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Question - Ultra Conservative is a finance company with total assets of $50 million, most of which is made up of small business loans of $46 million. The following selected data relates to Ultra Conservative's first three years of operation:
31 December 2017
31 December 2018
31 December2019
Accounts Receivable-Business Loans
$40,000,000
43,000,000
46,000,000
Allowance for Doubtful debts
400,000
430,000
460,000
Debts to be written off
0
110,000
116,000
Ultra Conservative commenced operations on 1 November 2017and by 31 December 2017 had established loans worth $40 million and incurred no bad debts. However, the board of directors wanted to be conservative and decided on establishing an allowance amount of 1% of business loans outstanding at each balance date, (hence the figure of $400,000 at 31 December 2017). All business loans regarded as uncollectible were written off against the allowance for doubtful debts account. In the time since Ultra Conservative commenced operations there have been no cases where a business loan previously written off has had to be reinstated.
Required -
a) Prepare the journal entries to write off the bad debts in 2018 and 2019.
b) Calculate the net value of Accounts Receivable - Business Loans, at 31 December 2018 and 2019.
c) Evaluate the director's policy of providing for doubtful debts at 1% of Accounts Receivable - Business Loans outstanding at balance date.
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